Fiat-Chrysler merger now awaits shareholder buyouts

Marchionne says sell-off might delay deal, but it won't stop it

MILAN -- Following shareholder approval of the proposed merger of Fiat and Chrysler, Sergio Marchionne now faces an uncertain few months waiting to find out whether he has to postpone the tie-up because too many shareholders want to be bought out.

Marchionne, who heads both companies, plans to incorporate the two carmakers into Netherlands-registered entity Fiat Chrysler Automobiles. That would pave the way for a U.S. listing that is key to funding his ambitious investment plan to boost annual global vehicle sales to 7 million by 2018 from 4.4 million last year.

Fiat won the two-thirds majority it needed to go ahead with the merger at an extraordinary shareholders meeting Aug. 1. But Marchionne has said he will postpone completing the tie-up if Fiat has to spend more than the 500 million euros ($668 million) set aside to buy out shareholders who are not interested in being a part of FCA.

The buyout price for shareholders is $10.33 per share. A share drop below that amount makes it attractive for these investors to accept Fiat's cash offer.

"The more the stock drops, the more it increases expectations of more people selling out, which in turn increases the number of people selling," a Milan-based trader said. Concerns over the merger's completion triggered a sell-off that on Wednesday, Aug. 6, saw Fiat's stock hit $9.15 -- its lowest level since the company announced Jan. 1 that it would buy out Chrysler.

The cash-exit right is granted to dissenting investors under Italian law. Shareholders who did not attend the meeting also are eligible for a cash exit, boosting the chances of the 500 million euro cap being reached.

"The completion looks as if it will be very close, given 15 percent of shareholders did not vote in favor," ISI Group analyst Arndt Ellinghorst said in a report. "We estimate it will only take 5.18 percent of shareholders to exercise their cash-exit rights to scupper the transaction."

Marchionne says the sell-off might only delay completion of the merger, not prevent it. "Don't confuse the [timing] problem with the strategy," he said "It's a detail."

Fiat already owns 100 percent of Chrysler, and Marchionne has said the worst that could happen would be a delay in investments set out in the business plan for Fiat Chrysler that he unveiled in May.

Marchionne blamed overblown press reports and a "lack of understanding" of the merger for the share sell-off. "I am absolutely unfazed by all of this," Marchionne said, adding that if the creation of FCA failed at this time, he would wait "until we have better conditions to get this done."

Many analysts share Marchionne's positive view. Ian Fletcher of IHS Automotive said: "Even if it goes above the 500 million euros level, I don't see it being the end of things. The deal has come too far for that, and I don't doubt they would look at other options to get past that hurdle as they have done in the past."

Stuart Pearson of Exane BNP Paribas said: "It is more of a technical issue." Fiat has so much cash in reserve that the risk of facing a higher cost of borrowing would not be an immediate concern, he said. "They have the liquidity to fund the business plan for a while."

At the end of June, Fiat and Chrysler had combined cash reserves of $29.1 billion. But Fiat does not have complete access to Chrysler's reserves because of a number of bond covenants.

ISI Group's Ellinghorst said the sell-off is not completely related to the merger but also a reflection of the poor underlying performance at Fiat. "If the merger does not get approved or the U.S. listing does not go ahead, it has little bearing on the operations at FCA," he said.

Marchionne has yet to say whether he will seek to raise money for his business plan from a bond issue, a capital increase or an asset sale.

"However, it will not mark the end of the road," Ellinghorst said. "It is safe to say Mr. Marchionne will be back with an alternative merger proposal soon" if the current merger plan falls down.